Sunday, December 27, 2015

Many energy analysts like to make predictions at the end of the year for the coming year. Instead, I'll point to five possible surprises in energy--surprises because few people expect them to happen. I am not predicting that any of the following will happen, only that there is an outside chance that one or more will occur. Naturally, these surprises would move markets and policy debates in unexpected directions.

1. Crude oil ends 2016 below $30 per barrel. With oil hovering in the mid-$30 range it doesn't seem implausible that at some point in the not-to-distant future, crude oil will dip below $30 per barrel, if only briefly. What would surprise most people is if the crude oil price finished next year below $30 per barrel. The conventional wisdom is that cheap oil is giving a boost to the economy that will lift worldwide economic growth and thus demand for oil. There is also a belief that high-cost producers will simply have to stop drilling new money-losing wells after more than a year of financial Armageddon in the oil markets. This will bring down supply just as economic growth is rising, sending prices much higher as the year progresses.

The alternate view is that oil in the mid-$30 range is a reflection of an economy that has been weakening since the middle of 2014 and foreshadows a worldwide recession which should hit in full force by the end of 2016. In addition, with Iran almost certain to add to the current oversupply as sanctions are lifted and with the continued determination of OPEC to destroy the viability of tight oil deposits in the United States, the oil price could surprise on the downside, even testing $20 per barrel.

2. U.S. natural gas production declines. Despite persistent low U.S. natural gas prices, U.S. production has continued to grow. Most of the growth has been coming from two places: the Marcellus Shale where ample deposits continued to be economical in the range of $3 to $4 per thousand cubic feet (mcf) and Texas where furious fracking for oil locked in deep shale deposits also produced associated natural gas without concern for the price of that gas.

With oil drilling across the United States in precipitous decline because of low oil prices, we won't see nearly as much new natural gas associated with oil drilling as we saw in 2014 and 2015. With natural gas now hovering around $2, even the very sweetest of the sweet spots in the Marcellus are unlikely to be profitable to exploit.

Having said all this, U.S. natural gas production growth has continually defied predictions that it would dip in the face of low prices. Part of this had to do with desperate drillers carrying heavy debt loads who had to produce gas at any price in order to pay interest on that debt.

3. Several approved U.S. liquefied natural gas (LNG) export projects are postponed or abandoned. One of the memes of the so-called shale gas revolution was that the United States would produce far more natural gas than it consumes and that that would open the way for liquefied natural gas exports to other energy-hungry countries. Two things went wrong. First, U.S. production, while growing, has not exceeded U.S. consumption. Despite the highest natural gas production in history, the United States had net imports of natural gas of about 3 percent of its consumption so far this year.

Second, with the price of landed LNG around the world between $6 and $7, LNG exports from the United States are currently uncompetitive. Even with U.S. natural gas at $2, when the cost of liquefying and transporting gas--about $6 per mcf--is added to the American price, landed LNG prices would have to rise to about $8 just for American suppliers to break even. And, of course, just breaking even is not a proposition investors are very much interested in.

Now, some of the export projects have already undoubtedly received commitments from buyers to take U.S. LNG under long-term contracts, usually priced at Henry Hub plus a certain amount for liquefying and transporting the gas (plus something to reward investors, of course). If those contracts are in place, then the builders of the LNG export projects don't care what U.S. prices are. They make money no matter what. And, it doesn't matter whether they export so much LNG that the United States is forced to IMPORT more from Canada via pipelines or possibly in the form on LNG itself.

Whether buyers make out under such an arrangement will all depend on how world spot LNG prices unfold over the next couple of decades. Undoubtedly, many of those with long-term contracts today would be better off buying in the spot market. But, of course, when prices are high, they have no protection.

What we'll find out this year is which projects have contracts from buyers and which do not. The ones that do not yet have such contracts will almost certainly be postponed or abandoned. For those that proceed, investors who are not careful to understand how much of the capacity of the project has been taken up by long-term contracts and how much will be sold on the spot market may be in for rude surprises if they are too exposed to the spot market and that market remains soft.

4. Bipartisan support for climate change measures emerges in the U.S. Congress. You will certainly think I'm reaching here, and it would be a surprise if this does happen. But expectations for the recent climate conference in Paris were extremely low. And yet, world leaders hammered out an agreement that committed the parties to emissions limits with regular reviews. True, there is no enforcement mechanism. But even so, this result was better than most anticipated.

The same could go for a U.S. Congress stalemated on the climate issue. Even though the Republican majority has taken the view that regardless of the science, Republicans are better off opposing any measure to address climate change, not all Republicans have taken this extreme position. If enough of them peel off and join Democrats on even a small measure, it will mark progress--though it will certainly be a surprise coming in an election year.

5. World oil production declines. In the past world oil production has declined only during recessions or once in the early 1980s following a long period of rising prices and the most severe recession since World War II (that is, until 2008). We've had a long period of price rises from 2000 onward, followed by a severe recession. But production continues to eke out some growth.

According to figures from the U.S Energy Information Administration, worldwide production of crude oil including lease condensate (which is the definition of oil) grew by 15.7 percent in the nine-year period leading up to 2005. In the nine-year period from 2005 to 2014, production grew only 5.3 percent despite record prices and investment.

If worldwide production declines, it will almost surely be because drillers simply lay down even more rigs and companies delay development of tar sands mining projects in Canada to wait for higher prices. This restraint would have to counterbalance additions to world production expected from Iran which will have sanctions lifted in 2016 allowing it to increase its oil production and exports substantially. If peace breaks out in Libya, then the rise in Libyan oil production will probably prevent an overall decline in world production.

Recap of 2015's list of possible surprises

1. U.S. crude oil and natural gas production decline for the first time since 2008 and 2005, respectively. While U.S. crude oil production in 2015 looks like it will exceed total production in 2014, production began to slide in June this year and continues downward. So, there was a surprise for those who thought the so-called shale revolution could go on without high prices. Natural gas production continued to rise so there was no surprise there.

2. World crude oil closes below $30 per barrel. This hasn't happened yet and probably won't with only a few days left in 2015. But a price in the mid-$30 range has certainly surprised a lot of people, especially those who were touting the midyear recovery of prices to around $60 as the beginning a new oil bull market. So, this did come as a surprise, but not quite (yet) the $30-per-barrel variety.

3. Developments in solar thermal energy show that it can solve the storage problem for electricity from renewable energy. Perhaps the biggest obstacle to broader use of electricity generated by renewable energy is the high cost of storing that energy for use when people need it. A Maryland inventor is still trying to put together funding for a prototype of a possibly revolutionary solar thermal capture device that he claims has 90 percent efficiency. There's no prototype yet. Perhaps in the coming year we'll find out whether the claim can be confirmed. So, no surprise here yet.

4. A climate agreement in Paris calls for binding greenhouse gas emissions limits. Okay, the greenhouse gas limits weren't binding. And, of course, that's not a surprise. What surprised me is how unanimous the world's leaders were about the problem of climate change and how specific they were about limits in the agreement.

5. Oil prices reach $100 per barrel before December 31, 2015. This possible surprise was premised on a robust world economy and an OPEC relenting on its war on frackers in America and tar sands in Canada. The OPEC war continues, and the world economy seems weaker at year-end than when it began.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 20, 2015

As the U.S. Federal Reserve Bank raised interest rates last week for the first time in 10 years in response to what it said was strength in the U.S. economy, economically sensitive commodities such as industrial metals and crude oil continued to plumb new cycle lows.

Either these commodities are about the turn the corner as renewed strength in the United States--the biggest buyer of commodities next to China--revives industrial metal and crude oil demand--or the Federal Reserve is misreading the tea leaves and crashing commodity prices signal a world and U.S. economy in distress.

And, it wasn't just copper. Nickel started the year above $7 a pound and finished last week at $3.90 a pound. Aluminum began the year above 90 cents a pound and settled last week at 67 cents. Zinc peaked near $1.10 a pound in May and now sells for 66 cents. Iron ore prices, which dropped almost 50 percent last year, this year dropped from $68 per ton to $47 as of last week, another 31 percent decline.

So, given this picture of the price trends for basic materials which are key to the economy, why has the Fed concluded that now is the time to start raising rates?

A clue comes from the analysis of Doug Noland who has been following what he calls the greatest credit bubble of all time. Noland explains that the swoon of emerging market countries--which include commodity producing economies such as Brazil, Russia, Mexico and other mineral and petroleum exporting nations--has sent money scurrying to what he calls "the core," the United States, Europe and Japan. For a while this flow will buoy these core areas by injecting money into their economies and stock markets.

Eventually, the financial rot in "the periphery," the emerging market countries mentioned above, will reach the core and slow their economies while threatening their financial institutions which hold increasingly shaky debt from periphery countries.

It is always darkest before the dawn, the saying goes. When referring to his own worst investment decisions, legendary fund manager Peter Lynch loved to parody that saying with this rewrite: It is always darkest before it goes pitch black.

Either commodities are correctly forecasting the direction of the overall world economy or the world's "core" economies are about to lead the world economy back toward faster growth. The outcome will determine the fate of trillions of dollars of investments premised on the idea that one of these indicators is right.

For my take on last week's repeal of the U.S. oil export ban, see my piece from September entitled, "Truth takes a hit in battle over U.S. oil export ban." The ban was lifted as part of a huge federal spending bill in which supporters of renewable energy got renewed tax credits for solar and wind power in exchange for accepting repeal of the ban.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, December 13, 2015

The dramatic drop in oil prices has created what are called "zombie" companies, oil companies which can still afford to pay interest on huge debts, but little else. If oil prices stay low, the problem is likely to spread and become an economic zombie apocalypse for much of the industry and the communities and countries that depend on it.

Meanwhile, consumers have rejoiced as cheap oil prices have led to cheap gasoline, diesel, heating oil and jet fuel. Both households and businesses are finally getting their revenge on the oil companies after a decade of high and rising prices.

But should those consumers be so sanguine? Can the low prices we are experiencing today be extrapolated far into the future? The conventional wisdom says yes. It claims that the American fracking boom of recent years has unleashed a flood of oil that will keep prices down for many years to come. Combine that with an undisciplined OPEC that pumps flat out and you get not a temporary dip in prices, but a new era of low-cost oil and oil products.

But the same facts can be interpreted as leading to serious future supply constraints and high prices, provided the world economy does not fall into a prolonged slump that would reduce oil demand.

Cheap financing fed the fracking boom. And, even though borrowed funds are still cheap, struggling oil companies are finding their bank lines of credit reduced and a bond market that is shunning their high-yield debt. With additional funds hard to raise, many independent companies are finding it difficult to drill new wells needed to make up for declining production from existing ones, around 40 per cent per year in the two largest tight oil formations--the Eagle-Ford in Texas and the Bakken in North Dakota--where fracking is the primary technology for extracting oil.

The U.S. oil rig count stands at 524 for the week ending December 11. A year ago it was 1,546. U.S. oil production (crude oil including lease condensate) is estimated to be down about 450,000 barrels per day from the peak in early June of 9.6 million barrels per day, according to the U.S. Energy Information Administration.

While some say that a rising oil price would quickly reverse the current downward trend in drilling activity in U.S. tight oil fields, the key will be whether investors will provide the capital needed to do so. So, it's important to understand that the OPEC war on American drillers also extends to those who finance them. If the thumping investors have taken so far as result of the long, deep slide in oil prices makes them reluctant to fund new drilling in the United States when prices rise, the presumed fast ramp-up in U.S. drilling won't take place. The necessary cheap and ready credit won't be available as it has been in the past.

This may be what OPEC is counting on, that investor sentiment will be so damaged by the current price war that when world supply does finally come into balance with demand, U.S. drillers won't be back very quickly or in numbers seen at the height of the boom. Moreover, investors won't be easily fooled a second time by an industry that even at the peak of the boom saw most companies experience persistent negative cash flow.

There is another scenario that is suitably apocalyptic in line with the zombie apocalypse taking place in the oil industry. In this scenario the world economy plunges into a lengthy depression brought on by years of previously high oil prices (which have sapped the strength of the world economy), bursting stock market bubbles, and a merciless debt deflation ignited in part by cascading oil industry defaults.

This scenario would keep oil prices low. But it would also prevent investment in most remaining prospects--prospects that are increasingly expensive to exploit such as tar sands, arctic and deepwater deposits. This implies that oil prices would rise even in a depressed economy, but not sufficiently to make these high-cost resources viable. Relatively high oil prices would put pressure on an already slumping economy and possibly lead to an even deeper slump.

Few people currently anticipate such a vicious circle. But the evidence suggests that none of us should be complacent as long as zombies roam the world's oil fields.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, November 29, 2015

There is the story of our personal lives: our family, our friends, our jobs, our hobbies. There is the story of our communities: our civic, religious, business, artistic and recreational lives. There is the story of our nations: their internal political struggles and their struggles with each other.

But now, there is one grand narrative which ties us all together, whether we want to be connected or not, whether we are preoccupied with our personal, community or national narratives or not. That is the narrative of our changing climate and the resulting threat to the continuity of our world civilization. The climate talks in Paris are but one expression of this new reality.

Even people who oppose doing anything about climate change are forced to talk about it. Even people who somehow have convinced themselves that climate change is not happening and oddly, in the same breath, claim that humans have nothing to do with this thing that is not happening--even those people confirm by their very framing of the issue that they are firmly situated inside this narrative.

Climate change is now the grand narrative because what happens to climate and what we do about it will be a worldwide story which no one can ignore. As such there will be few people without an opinion on the issue of climate change. Increasingly, it will reach down into our national, community and personal lives in ways we had hoped would wait until we are gone. The droughts, the heat, the floods, the damage to crops, the lengthening summer, the late fall, and the early spring--none of them can escape our notice.

We are forced to incorporate the changing climate into our everyday conversations. It is already a big topic among anyone who gardens and certainly anyone who farms. Among those in touch with plants the evidence of a changing climate is incontrovertible.

The grand tension will be how to address climate change without giving up the abundant energy, food and technology that have given us such comfort, ease, mobility and opportunity. Neither side in the debate over what to do wants to relinquish the hope that we will have to give up almost nothing.

One side says we should continue to burn fossil fuels, to raze the forests, and to farm the fields in ways that release carbon from the soil into the air...and that we will continue to be able to live the modern industrial life we've become used to. Any consequences of climate change will be manageable (an argument that becomes less plausible with each passing day).

The other side implores us to embrace carbon-free energy sources, move toward better care of the forests and the soil, sip what energy we use instead of gulping it, adjust our habits and lifestyles...and we will continue to be able to live a green version of the modern industrial life we've become used to.

But underneath it all, we fear and suspect that either path will involve some loss, some sacrifice. And, it is that fear and suspicion which prevents us from committing to do what we must do to save the best parts of our culture and society while letting go of the worst. It is the fear of change and the fear of loss which is holding us back from truly addressing the existential threat of climate change.

If someone were holding a gun to our heads, it would be clear that we were in danger. But, climate change creeps into our lives gradually. Few people can see that climate now has a seat at every negotiating table, that climate has become a political actor with an unyielding, non-negotiable position. We can choose to think of climate change as a brutal, remorseless malefactor with no sympathy for humankind. But we can also choose to think of climate change as a messenger, a symptom like a recurrent fever, telling us that our society has overstepped its bounds and needs to rethink its way of life to regain its health--or face worse consequences.

It is in the evolutionary makeup of humans to seek to maximize their power intake. In fact, it is in the evolutionary makeup of every organism to do so. By maximizing the power available to us we increase our chances of survival as individuals and as a species. But, this impulse is at the heart of our climate difficulties.

Like a pioneer species in a clearcut forest, humans expanded rapidly after the broad deployment of fossil fuels. But, pioneer species ultimately give way to mature forests which reach optimum rates of energy, mineral and water cycling--rates that can maintain the balance of the forest over very long periods. The forest enters a less dynamic, but stable equilibrium that makes longevity possible.

To borrow from economist Herman Daly, we now live in a "full world" and we must come to grips with that new reality. Human society cannot grow its consumption of energy and resources forever. But we can grow in our social, artistic, intellectual and spiritual lives indefinitely.

Climate change is giving us the first universally understood signal that it is time to reconsider our collective future. Will we risk the destruction of all that we hold dear in exchange for a few more decades of a fossil fuel party that is undermining our health and the health of the planet? Or will we choose to embrace not only changes in the physical infrastructure upon which we base our material lives, but also a new vision that can endlessly engage our hearts, minds and spirits in the kind of growth that has no limit?

Our answers represent the climax in the new grand narrative of climate change--essentially a choice that will be reflected in our individual daily acts and in the collective acts of our communities and our nations.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, November 22, 2015

As U.S. regulators cleared genetically engineered salmon for sale in the United States last week, they opened the door to what many scientists already feel is inevitable: The escape and reproduction of GE salmon in the wild and the possible destruction of competing wild species.

Under the U.S. Food and Drug Administration-approved application, the company behind the so-called AquAdvantage Salmon, Aqua Bounty, can only raise such salmon in land-based tanks with "multiple and redundant levels of physical barriers to prevent eggs and fish from escaping." These barriers are described in detail and suggest that it will be very difficult for any eggs or fish to escape into waterways.

The FDA said it considered four interrelated questions about confinement of the fish:

What is the likelihood that AquAdvantage Salmon will escape the conditions of confinement?

What is the likelihood that AquAdvantage Salmon will survive and disperse if they escape the conditions of confinement?

What is the likelihood that AquAdvantage Salmon will reproduce and establish if they escape the conditions of confinement?

What are the likely consequences to, or effects on, the environment of the United States should AquAdvantage Salmon escape the conditions of confinement?

Right away we can see that the FDA is asking these questions in the wrong way because it misunderstands the risks involved. It should be asking if there is ANY LIKELIHOOD WHATSOEVER that the salmon will escape, survive, disperse, reproduce and establish populations in the wild.

Why is it important to ask the question in this way? Because although the salmon are sterilized, the "sterilization technique is not foolproof," according to The New York Times.

So, here is the relevant principle: Any invention with a nonzero risk of systemic ruin and which is produced and deployed long enough will with almost 100 percent certainty create that ruin. Put more informally, if you keep repeating something that each time you repeat it has a small chance of creating catastrophe, eventually you will produce catastrophic conditions, that is, systemic ruin. Systemic ruin in this case would be the ruination of the wild salmon fisheries overrun by the GE type.

And, the damage might include other harmful effects to waterways and their associated wildlife that we cannot now anticipate. Remember, this is a fish that we've never seen operate in any existing ecosystem. We have no empirical data about its possible effects; and, releasing such fish into the wild to obtain that data risks the very ruin we wish to avoid.

Now, there is one final question which the FDA asks: "What are the likely consequences to, or effects on, the environment of the United States should AquAdvantage Salmon escape the conditions of confinement?"

Again, this is the wrong way to ask the question. The effects would not be confined to the United States since the escape of one unsuccessfully sterilized salmon into the wild could lead to a worldwide infestation. (In any case, the facilities approved for farming the salmon are in Prince Edward Island, Canada and in Panama. But apparently, only the possible environmental effects in the United States were considered.)

Anything that is novel cannot by definition have a history to draw on. A novel invention might not alter the environment very much or it might alter it radically. We cannot know. To say that we should subject the world's salmon fisheries to the possibility of ruin in order to find out reveals a failure to understand that self-propagating, worldwide dangers do not lend themselves to cost-benefit analysis.

When the cost is the complete ruination of a system, we must judge costs to be incalculable. The complete destruction of the global wild salmon population is not 10 times worse than the destruction of 10 percent of that population. It is infinitely worse. It is infinitely worse because you cannot repopulate the world with an extinct species (except perhaps in science fiction movies). There is no remedy.

And, we must keep in mind that we do not now know how many other facilities like those built by Aqua Bounty will be constructed. The danger of release grows with each added facility. And, of course, we must assume that Aqua Bounty wants to expand as a company which implies many more facilities should the company become successful. Also, keep in mind that such facilities, although on land, must have extensive plumbing and drains which must ultimately connect with the external world. Is it rational to believe that GE salmon or salmon eggs will never, ever make it into a waterway and survive, an event which must happen only once for a possible cascade of destruction of wild species to take place?

So, we should say that the risk is real and the scope and severity, if realized, would be catastrophic.

Understanding this allows us to see why the precautionary principle applies in this situation and in the cases of all genetically engineered plants and animals. Anything that is novel, self-propagating and worldwide in reach has the possibility of creating systemic ruin. Which leads us to another key principle: It does not matter how many times something succeeds if failure is too great to bear.* In other words, it does not matter if millions upon millions of GE salmon are produced without any release into the environment when the inevitable release of one (by mistake, carelessness, accident or poor design) could create ruinous global consequences. (And, if the GE salmon industry grows, it is difficult to believe that there will be only one inadvertent release over time. Accidents happen--even when we think we have designed foolproof systems.)

Whether such a fish is safe for human consumption is not the key question--though the FDA answers that it is safe. That's what makes the announcement of the approval so misleading. What difference does it make if this GE salmon is safe to eat if, in the event of escape and propagation, it ultimately destroys the entire wild salmon fishery and has other unforeseen and catastrophic effects on marine life.

______________________________________________________

*This formulation comes from author and risk expert Nassim Nicholas Taleb, author of The Black Swan and many other works on risk.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, November 15, 2015

As the world mourns those who died in Paris last week in a killing spree for which the Islamic State in Iraq and Syria (ISIS) has claimed responsibility, reporters and commentators have been discussing the motivations behind the attacks. I'm not sure that any so far has considered whether one can draw a straight line from a severe drought in Syria to these mass killings. My own answer is that if the line is there--and I think it is--then it has taken many twists and turns before arriving in Paris.

Even so, it might be worthwhile for those who will soon be gathering in this bereaved city in order to negotiate a new worldwide climate treaty to understand any such connection. For in the background behind these events, there is a Syria starved of water almost surely because of climate change.

A study released earlier this year suggested that the first link in the causal chain that led to the current conflict in Syria was a severe drought lasting from 2006 through 2009, a drought that yielded some of the strongest evidence yet for the link between climate change and increasingly extreme droughts.

Some social scientists, policy makers and others have previously suggested that the drought played a role in the Syrian unrest, and the researchers addressed this as well, saying the drought "had a catalytic effect." They cited studies that showed that the extreme dryness, combined with other factors, including misguided agricultural and water-use policies of the Syrian government, caused crop failures that led to the migration of as many as 1.5 million people from rural to urban areas. This in turn added to social stresses that eventually resulted in the uprising against President Bashar al-Assad in March 2011.

It is not that climate change causes people to be violent so much as it exacerbates their violent tendencies. Lack of water and the failure of harvests can make people very, very angry--angry and susceptible to those who promise revenge against the perceived perpetrators of their problems.

But, one cannot fight climate change with guns. So, when the guns come out, they get pointed at people for reasons few trace back to climate change. Simmering grievances, old and new, can find their expression, it seems, in armed conflict when the heat from global warming is turned up this high.

The paramount concern in Paris now is for the safety of those thousands of scientists, policymakers, businesspeople, reporters and world leaders who will be descending on the city for the United Nations Framework Convention on Climate Change between November 30 and December 11. Will it enter the attendees' minds that the savage attacks in Paris are in some way linked to climate change? Will the broader public worldwide see the link?

We humans have a natural proclivity to fight over things we want and need such as water, food, and energy resources. Climate change will make our ability to obtain all of these in sufficient quantities either more difficult (food and water) or more problematic (greenhouse gases from fossil fuel energy resources).

More conflict over these basics that is linked to climate change cannot be far in the future. And, that means that the upcoming climate talks in Paris will not just be about climate. They will also be about conflict and peace. Without substantial progress on climate change we are likely to see ever more conflicts that begin with deprivation brought on by climate change, but which quickly spiral into wars with ideological, ethnic and religious dimensions that engulf entire regions.

Many readers may know the old adage about the relationship between peace and justice: "If you want peace, work for justice." To that we must now add a new variation: "If you want peace, you must work for policies and practices that seriously address climate change."

May the Paris negotiators find the courage to do just that.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, November 08, 2015

Let's see what those disparaging America's rate of recycling as "too high" either get completely wrong or fail to understand. You can read recent commentary suggesting that the recycling rate is too high here, here and here.

The number one complaint is that it costs more to recycle some categories of waste than to put them into a landfill. What the critics fail to comprehend is that unlike a couple of generations ago when most landfills were owned and run by local governments, today most are run by profit-making enterprises such as Waste Management Inc. and Republic Services Inc. which haul some 80 percent of the nation's refuse. Those enterprises developed their large centralized landfills for the purpose of keeping down their disposal costs.

Since the private waste disposal industry has organized its infrastructure around cheap landfill disposal, it's no wonder that landfilling seems like the most cost-effective option. It follows that if we Americans had built a waste infrastructure with the goal of zero waste as Germany did, our infrastructure would naturally have delivered lower costs for recycling than it does.

Consider this analogy. You can make your house energy-efficient in two ways. You can build it to be energy-efficient in the first place. Or, you can add energy-efficient features later on. Which do you think would be more cost-effective?

That's what we've been facing with the boom in recycling. We are retrofitting a system designed for cheap landfilling rather than building a system designed for cheap recycling (which ought to be our goal).

But we must also consider that the narrowly defined cost of landfilling waste does not take into account the long-term costs of monitoring and mitigating damage to soil and water from closed landfills far into the future. Private landfill operators are responsible for what happens for the first 30 years. After that, taxpayers pick up the bill. But only if officials decide to. Otherwise, the cost to human and animal health and the loss of value for properties affected is simply absorbed by those unlucky enough to live or work near a closed landfill.

Now, this is important: Current landfill technology which lines waste pits will not keep pollutants from leaking out forever. In the long run, whatever goes into landfills will eventually seep out with rainwater or sink into the soil below once the lining deteriorates.

Finally, landfills are a source of methane, a potent greenhouse gas, produced by rotting organic matter in the waste. Some of that methane is being captured and burned as fuel. But some of it is released into the atmosphere where it is driving climate change.

When we say that landfilling is cheaper, what we really mean is that landfilling is cheaper for us--not for those who come after us who will have to clean up the mess that keeps on giving.

The howls over the costs of recycling tend to reappear periodically when commodity prices sink as they have done so dramatically in the last year.

That's because recycled materials such as paper, plastic and metals compete with newly harvested or mined materials. When commodity prices are high, recycled material is in demand because it is cost-competitive with virgin materials. During such periods nobody seems to complain about the supposed burdensome costs of recycling because recycled materials are fetching such healthy prices. (Consequently, at such times the nation's editorial pages tend to be silent on the topic of trash.)

When prices are low, the recyclers complain that they cannot earn enough for their recycled materials which must compete with low-priced virgin material being dumped on the market by suppliers desperate for cash. (Predictably, the nation's editorial pages start to take a closer look at trash when this is the case.)

But just like forestry, oil and gas and mining companies and the manufacturers who rely on their raw materials, recyclers ought to have business plans that take into account the full commodity price cycle. Weyerhaeuser Company, the forestry giant, doesn't just close its doors when wood product prices are low. It has a plan for getting through to the next upswing.

While there is room for debate about what materials are currently most cost-effective and environmentally important to recycle, that should not distract us from the goal of creating a cradle-to-cradle society, that is, one in which all products are designed to be converted into other materials or products at the end of their useful lives. The consequence of such design is practically zero waste.

Of course, it's no wonder that waste haulers are not particularly interested in a zero landfill goal since it would leave their existing landfills without customers.

But one simple policy change could make recycling much more attractive, even in times of low commodity prices. Tax trash. Tax anything that is dumped in a landfill. The higher the tax, the more likely someone will figure out how to 1) minimize waste in the first place and 2) recycle what waste remains more efficiently.

Any mention of a tax on trash would undoubtedly cause the lobbyists for waste haulers to darken the skies over Washington, state capitols or city halls where the mention was made. But that doesn't make a trash tax any less of a good idea as a way to get us all focused on the real goal: less trash, more recycling, and, with what we cannot currently recycle, energy generation using best practices.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, November 01, 2015

One of the big complaints about climate change deniers is that they don't fund any genuine primary scientific research into climate change.

We are used to deniers extracting out-of-context passages from existing legitimate climate research and pretending those passages support the denialist position. But wait...we now know, thanks to recent coverage by Inside Climate News and the Los Angeles Times, that at least one climate change denier did fund a great deal of legitimate climate research.

And, what did that research show? It showed that climate change is real, is caused in great measure by human activities and has the potential to disrupt human society significantly. To be fair, when Exxon Corp. (now Exxon Mobil Corp., the world's largest publicly traded oil company) engaged in this research in the 1970s and 1980s, it was genuinely trying to understand the relationship between carbon dioxide emissions and climate change. During that time Exxon scientists collaborated openly with prominent academic and government researchers and were even praised for their commitment and professionalism.

But, as we all know, that openness did not last. As the scientific findings became more alarming, the company began to see the findings from climate research as a threat to its business. Exxon launched a public relations offensive to dispute what climate researchers around the world were discovering, an offensive that lasted until 2008 when the company announced that it would end its support for the vast network of climate change denial organizations it had helped to build. (Whether the company did, in fact, end that support is disputed.)

You can read all the gory and disturbing details concerning this turnabout at the sites linked above. Some might consider this old news. Those who keep up on climate news are certainly familiar with the large denialist apparatus of front groups, fake think tanks and public relations firms supported by Exxon and others.

What's new is the revelation about how deeply committed Exxon was to actual legitimate scientific investigation and how much it did to further our understanding of climate change--including creating some of the most sophisticated climate modeling of the time. Those models are similar to models used by climate scientists today. But the company now derides such models as "useless."

Given all this, it is hard to overstate how brazen and cynical Exxon's leaders became. In the early 1990s, even while Exxon spokespersons and Exxon-funded front groups were decrying the inadequacy of climate models and downplaying the threat of climate change, the company was sponsoring a team of scientists to evaluate how a warming planet might affect exploration opportunities in the arctic as the sea ice melted. The prognosis looked good over the long term for turning arctic prospects--then inaccessible and risky--into profitable operations once the ice began to melt (as it has now started to do). The company was also interested in how melting permafrost would affect its pipelines and processing facilities which might be in danger of sinking into a landscape softened by warming.

But here's the real kicker: The team used climate models developed by Environment Canada, the Canadian government's environmental agency, to create its positive assessments about the eventual accessibility of underwater arctic oil and natural gas deposits. So, while the company was disparaging climate models, it was simultaneously salivating over the oil and gas profits that those very models predicted a warming arctic would make possible from the company's arctic leases. And, of course, the main ingredient for the warming represented in those models was the very carbon dioxide produced when Exxon's oil and natural gas was burned by its millions of customers.

Exxon has long used models to predict what it will find underground wherever it is thinking about drilling. It uses them to manage its existing oil and natural gas reservoirs. It uses models to calculate its reserves and implores its investors and the U.S. Securities and Exchange Commission to believe the numbers its models spit out. For this reason, it is completely obvious that Exxon has no genuine objection to models of the physical world--except when those models might undermine the company's profitability.

The closest analogy is the cover-up by tobacco companies of research they did into the harmful health effects of smoking, but which they lied about to the public for many years. Those companies ended up getting sued by individuals, states and the federal government for health costs associated with smoking. But the tobacco companies are still in business and doing quite well.

I think those supporting an investigation of Exxon are hoping for criminal charges. There is a feeling that the company perpetrated a fraud on the public, that it lied about the dangers of its products while insisting on their safety. Fraud is indeed a crime. However, people mostly end up getting sued for it. Only a few actually go to jail.

It seems doubtful that such a prosecution could ever succeed. Exxon makes legal products that work as advertised. And so far, it's not illegal to do things which change the world's climate. It's true that the company has been trying to confuse policymakers and the public about the nature of the scientific research on climate change. But the First Amendment protects even people and companies who lie about matters of public policy--so long as companies don't lie about their products to the people who buy them.

Exxon never explicitly promised that burning oil and natural gas would not affect the world's climate. The company merely adopted the legally safe position of saying that the uncertainties surrounding climate change research were great. And, of course, it funded front groups to make it seem as if this message of uncertainty was coming from many places, not just one. But, none of this appears illegal, even if it is unseemly.

If I worked in the higher echelons of Exxon Mobil today or at any time in the last couple of decades, I'd be much more worried about being brought before some future international court to answer for what are called "crimes against humanity." In such a court, the protections afforded by U.S. law would be irrelevant. And, with the damage inflicted by climate change, say, by 2030, the public appetite for someone to blame might well be insatiable.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 25, 2015

Several years ago over lunch a medical researcher I know told me that industrial chemicals were disrupting the human endocrine system leading to widespread obesity and diabetes. He said his research had revealed an important cause--the decline in the production of testosterone in both men and women (yes, women produce a little testosterone) due to this disruption. When this deficiency was reversed, patients experienced significant improvement in both obesity and diabetes.

That's not all. He explained that most people believe that poor diet and little exercise are the central cause of obesity and diabetes. No doubt poor diet and exercise are important contributing factors. But when the body's signaling system fails to indicate when it has had enough to eat, it's hard for most people to recognize that they need to stop eating. How many of us know people who say that they are hungry all the time? A normal human being with a normal endocrine system should not feel "hungry all the time."

The link between what has become a sweeping twin epidemic and man-made chemicals is getting wider notice these days. But the link between endocrine disruption, obesity and diabetes is still absent from popular medical accounts such as those found on WebMD for obesity or on official sites such as that of the World Health Organization.

Endocrine disruption has also been linked to cancer, reproductive failure, neurological disorders and developmental problems in fetuses, problems that can lead to illness later in life. In fact, industrial chemicals known to disrupt endocrine function are found in humans and animals worldwide.

The subject of endocrine disruption first burst into the public mind with the publication of Our Stolen Future in 1996 by three scientific researchers. They sought to make the issue more accessible to the public in order to galvanize action.

A few companies have voluntarily eliminated a known disruptor from the linings of food cans and in plastic bottles and containers. But the disruptor, bisphenol A, commonly referred to as BPA, while banned from baby bottles, continues to be used widely.

And, therein lies a difficult regulatory problem. Since known endocrine-disrupting chemicals do their disrupting at extremely low concentrations, nothing short of a complete ban would likely keep them from affecting humans and animals.

What this means is the entire human and animal population of the planet is now involved in an uncontrolled experiment courtesy of the chemical industry. We are all exposed to a soup of man-made chemicals every day, some of them endocrine disruptors.

The industry says it is up to the public to prove somehow that these so-called disruptors are present and dangerous. How the public would build the expensive facilities and pay the high-level personnel needed for such a task is ignored. Government regulatory agencies and a few university laboratories have taken up some of this work.

But this puts the burden of proof in the wrong place. It should be the industry which proves that novel chemicals put into food or released into the environment are safe for humans and animals.

This approach is commonly known as the precautionary principle. It essentially places the burden on the company to prove a novel chemical is safe BEFORE it is introduced into society and the environment. The European regulatory authorities implemented such an approach in 2007 called REACH over the loud objections of the chemical industry. The authorities have put the industry on notice that chemicals of "very high concern" will either have to be shown to be safe or be phased out. (That REACH does not classify BPA as dangerous to adults shows that even cautious European regulators don't understand that very low doses can be damaging.)

The precautionary principle embodied in REACH is simple. If you are going to expose anyone in the public to a man-made substance without explicit consent, you need to prove that the substance is benign or of such great benefit to society that the risks associated with exposure are worth the danger. This is a very high bar to clear, and many toxic chemicals won't make the cut under the European rules.

Partly, this is because regulators granted a 10-year grace period during which chemical makers have had an opportunity to find less toxic or nontoxic substitutes. Without REACH, it is doubtful the industry would have bothered to do so.

So-called "green chemistry" is one response in an effort to find chemicals that minimize environmental and health impacts.

Meanwhile, the public health effects of endocrine disruption are growing, undermining the health and happiness of millions across the planet. And, the costs are mounting for the treatment of obesity, diabetes, cancer and a host of other health problems related to the great global chemical experiment in which we are all participants, whether we wish to be or not.

The chemical industry is risking nothing short of a rebellion by the public and governmental authorities if it continues to fight sensible precautionary regulation. Will the day come when there will be enough evidence to link obesity or diabetes or both more directly to chemical exposures? If that day comes, it will be the beginning of the end of impunity for the chemical industry as the legal establishment feasts on the toxic profits of the companies at the center of the epidemic.

The World Health Organization estimates that 9 percent of all adults over 18 have diabetes. I couldn't find global population figures for those 18 and older. But of those 25 and older, that must mean that approximately 372 million have diabetes worldwide. If the fight over diabetes becomes a legal battle similar to that experienced by tobacco companies, the plantiffs' lawyers will run out of chemical companies to sue long before they run out of clients.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 18, 2015

We all know Goldilocks from the story of Goldilocks and the Three Bears in which the young maiden wanders into the home of the bears and samples some porridge that happens to be sitting on the dinner table. The first bowl is too hot, the second is too cold and the third is just right.

Like a corporate version of Goldilocks, the oil industry has been wandering into the world marketplace in recent years often finding an oil price that is either too high such as in 2008 and therefore puts the brakes on economic growth undermining demand and ultimately crashing the price as it did in 2009. Or it finds the price too low as it is today therefore making it impossible to earn profits necessary for exploiting the high-cost oil that remains to be extracted from the Earth's crust. Oil that hovered around $100 per barrel from 2011 through much of 2014 seemed to be just right. But those prices are now long gone.

Violent swings in the price of oil in the last decade have made it difficult for the industry to plan long term to produce consistent supplies at moderate prices. This has important implications for future supplies which I will discuss later.

The great political power of the oil industry has led many to conclude erroneously that the industry must also somehow control the price of oil. If the industry has such power, it is doing a really lousy job of using it.

It is true that in times of robust demand, OPEC can maintain high prices by limiting oil production in member countries. But when demand softens, OPEC rarely exhibits the necessary discipline as a group to cut production. Typically, Saudi Arabia shoulders most of the burden of reduced production under such circumstances.

Which is why it was so shocking when, during this most recent swoon in the oil price, the desert kingdom responded with an emphatic "no." No, Saudi Arabia will not curtail its production. And, since all the other OPEC members are unable to challenge Saudi Arabia's power--which consists of the ability to add production to counter cuts by others--the price of oil has stayed low.

The stated reason for this move is that Saudi Arabia wants to undermine American tight oil production. And, low prices are doing just that. The U.S. oil rig count peaked in October last year at 1609. In the week just passed that number was 595.

The low-price strategy seems to be knocking the competition out of the game. And, it's difficult to imagine investors in the future dumping great gobs of new money so freely into tight oil wells and the companies that drill them after having been thoroughly burned this time around. And, that's probably true even if the price of oil recovers significantly. There will always be the fear that Saudi Arabia will flood the market with oil and crash the price. (This is not, in fact, what Saudi Arabia has done so far. In the most recent oil price rout, the Saudis simply refused to cut the kingdom's then current production level--as it had regularly done in the past--even as demand softened and prices fell.)

Probably one of the best illustrations of the problematic future of oil supply is the recent abandonment of a multi-billion dollar arctic oil drilling project by Shell Oil Company, the American arm of the European-based Royal Dutch Shell PLC. Shell called its arctic discoveries "marginal" and indicated that it would cease drilling there for the "foreseeable future."

This emphasizes that the remaining oil available for extraction is both difficult-to-get and high-cost. It turns out that the oil discovered by Shell's arctic project comes in small packages instead of the giant reservoirs which have powered the oil industry and modern civilization up to now.

What this implies is that limitations on future supplies may result from the price of oil being too low. Contrary to the public perception that such limits would be accompanied by high prices, it is precisely high prices that make it possible to exploit the marginal deposits that are unprofitable today.

Analyst Gail Tverberg has elaborated this thesis in considerable detail on her blog Our Finite World starting as far back as 2007. Similar ideas have also been advanced by energy analyst and consultant Steven Kopits. (A 2014 presentation by Kopits is available here.) Tverberg's analysis is that high energy prices, particularly high oil prices, tend to suppress economic growth leading to recession and price declines. The lower incomes and lack of employment that accompany recessions make oil--despite its lower price--less affordable than is generally recognized. Lack of demand is partly the result of crimped living standards--which keep prices low, which, in turn, make it unprofitable to exploit high-cost oil.

Now, oil demand actually went up somewhat in the face of recent lower prices. But if Tverberg's thesis is correct, then demand won't hold up when the economy sinks into a recession or stalls close to zero growth. If the world economy shrinks or merely stalls, as it now appears to be doing, we may be in for a long stagnation for other reasons as the world works off debt built up previously in a long 30-year credit boom.

It seems only logical that if world oil production drops as a result of low demand and low prices, at some point shortages will appear and prices will rise even if the world economy remains in a slump. That may happen, but the big question will be this: Just how high can those prices rise before financially strapped consumers can't afford to pay more?

If that price turns out to be somewhat less than $100 a barrel, very few deposits of unconventional oil such as arctic and deepwater oil, tight oil from deep shale deposits, and tar sands will be profitable to produce. And these unconventional sources have been virtually the only engines of oil production growth in recent years. The International Energy Agency, a consortium of 29 countries which tracks energy developments, is already on record saying that conventional oil production peaked in 2006.

With violent swings in oil prices continuing, it's hard to imagine world markets delivering an oil price indefinitely above $100--which would encourage growth in unconventional oil production--but not above, say, $130, which could easily send the economy into recession and lower prices below the point of profitability for unconventional oil. It seems that either Tverberg's stagnation scenario will limit production because of low prices or that a return to robust economic growth will be doomed to be short-lived because oil prices rise above what the world economy can bear.

It's always possible that some technological breakthrough will allow us to get out of this cycle. But we should not count on this soon. As I have pointed out, the most recently touted "new" technology, the technology that opened the deep shale deposits in the United States for oil drilling, has a 60-year history of development:

For truly revolutionary technology to make an important contribution to the world's oil supply over the next 20 years, that technology would have to be available today, but not yet widely deployed. The cycles of innovation in the oil industry do not move nearly as quickly as those in, say, the semiconductor industry. Major breakthroughs in oil extraction require long lead times, and there doesn't seem to be anything but marginal improvements in some existing techniques in prospect for many years to come.

For now, we may be experiencing limits in oil production that are not absolute, but relative to what the world economy can afford. Of course, we could rework our infrastructure and daily practices to use less oil or even to begin to phase it out altogether. But, don't look for that kind of dramatic move anytime soon, either.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 11, 2015

On Wall Street buying options--options on stocks, on commodities, on currencies, on almost anything--has been seen as a sucker's bet (unless you are doing it to hedge an existing investment).

For the uninitiated, options are the right to buy or to sell something--practically anything really--at a set price over an agreed period of time. I can call my broker and buy the right to purchase Yahoo at $35 a share between now and April 15 next year for $2.32 a share. I can also buy the right to sell Yahoo at $25 a share for $1 a share. I might do this if I owned the stock and wanted to protect my investment in case of a decline. With Yahoo trading at about $32 a share, neither option would make me any money right now. But either one could make me money, and possibly lots of it, if there were to be a major move in Yahoo either up or down between now and April 15. In essence, I would be buying volatility.

Yahoo dropping to $2 a share or zooming upward to $200 in the period before the options described above expire would surely destroy a significant chunk of the wealth of those who sold options to others that allow them to sell at $25 in the former case or to buy at $35 in the latter case.

But, it turns out that most stock and commodity options expire worthless. And so, those selling the options walk away with the premium paid by the buyer and then reinvest that money or spend it elsewhere. These option sellers (or "option writers" as they are often called) make a very handsome living during times of low volatility such as we have seen since the stock market bottomed in 2009.

But the true description of their situation comes from the world's most famous student of risk, Nassim Nicholas Taleb. He describes option sellers as people who are picking up nickels and dimes in front of a steamroller--and don't know it. They are selling options--sometimes for mere pennies--when they are risking dollars if they are wrong. Such events, they reason, are so rare that these events won't happen to them.

But they fail to understand that hidden risks in the world-at-large which affect the prices of financial instruments (and many other things in our lives as well) cannot be quantified or anticipated in a systematic manner. Taleb calls such hidden risks "black swans," defined as rare, unforeseen, but highly impactful events. When a black swan creates huge volatility in the financial markets, some option sellers can be wiped out. And, it turns out that such rare events are far less rare than standard financial models predict.

It stands to reason then that in a world of increasing instability such as the one that is now emerging--increasing geopolitical turmoil around the world (especially in the Middle East), increasing climate-related turmoil (for instance, last week's 1,000-year rain in South Carolina), and increasingly jumpy stock and commodity prices (especially oil)--that option sellers would be running for the hills.

But old habits die hard. Some options such as those on the S&P 500 Index are more expensive now than they were in July before all the volatility. But as yet, option sellers haven't faced the kind of wipeout many faced in the fall of 2008. The ever-present steamroller has picked up speed, but the option sellers don't yet seem to feel even the heat from the steamroller's massive wheel.

In a sense, anyone who has not played the risky game of stock and bond investing in recent decades is considered foolish. For the steady march of both markets from generational lows in 1982 to generational highs today has made anyone who simply bought and held seem like a genius.

Lucky, however, is not the same as smart or well-trained. We can be reasonably assured that someone playing Rachmaninoff on the concert stage didn't simply get there by chance. My dentist whom I visited only last week didn't extract my painful tooth by luck. That kind of work takes training--at least it does if you don't want the patient to feel the drill cutting up the tooth or the roots coming out as parts of the tooth are removed! But investment mavens and gurus who are listened to by millions may be nothing more than lucky to have caught the greatest bull market in history. Let's see how they do on the way down.

Options are really insurance, insurance against bad outcomes. People have car insurance, home insurance and even life insurance. But almost no one takes out investment insurance. The whole idea seems absurd when financial markets are "known" to go only in one direction, up. It is the legacy of an age of perpetual growth that we hear that the market always comes back.

Except when it doesn't. Japan's last great bull market peaked on the final trading day of 1989 when the Nikkei Index reached 38,957. The index touched its post-boom low in March 2009 just above 7,000. Today, 25 years after the peak the Nikkei stands at 18,438. That's what a stock market did in a country in which economic growth essentially stopped for 25 years.

Of course, nothing like that could happen today. We believe that we have figured out how to have only prosperous years without any side effects from the mountains of debt we've built up worldwide and the massive financial imbalances between rich and poor and between nations. We've learned to ignore disturbances like the ones currently going on in Syria and Iraq, in the South China Sea, and in Ukraine. Days of reckoning are for other people, not for us. We live in the financial land of perpetual sun where nighttime has been engineered away.

And yet, I can see the first shadows of a long forgotten economic, financial and geopolitical night starting to creep into our daily lives and into the mood of the times. I can see more volatile days ahead.

_____________________________________

Full disclosure: I own no investments related to Yahoo, the S&P 500 Index, the Nikkei Index or crude oil. I do own other investments that would benefit from high volatility in the stock and commodities markets.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 04, 2015

Last week a new television series set amidst the North Dakota oil boom debuted. Blood & Oil tells the story of locals and newcomers striking it rich in The Bakken, an oil formation that has been heralded as containing more oil than Saudi Arabia--a wildly misleading* but understandably alluring slogan.

Based on the first episode we can conclude that this program is not actually a contemporary drama, but rather a period piece--specifically the period when North Dakota was booming from about, say, 2009 to sometime in mid-2014. And, therein lies the story. For Blood & Oil, above all, must be a tragedy of broken dreams if it is to live up to its realism credentials.

We must look beyond the fact that the show is shot in Utah to the substance of the series. When we do, we see the ever-present gambler's mentality that dominates the American mind. It did not go unnoticed that America was a land of plenty from the very beginning of European settlement. One of the first European explorers and founder of the first permanent English settlement, Capt. John Smith, observed:

And in diverse places that abundance, of fish lying so thick with their heads above the water [that] as for want of nets (our barge driving among them) we attempted to catch them with a frying pan, but we found it a bad instrument to catch fish with. Neither better fish, more plenty, nor more variety for small fish had any of us ever seen in any place so swimming in the water...

Even though Smith's gamble of starting over in the New World got off to a rough start for him and his fellow settlers at Jamestown, those who came after did find the promised riches of land, forests, minerals and animals unimagined in the Europe of that day.

So, the gamble paid off often enough to convince many others on the European side of the Atlantic and ultimately the Asian side of the Pacific to make the journey.

With the coming of the Bakken oil boom we modern Americans have recreated that journey. Those needing work and with only minimal skills or possessed of a restless spirit found a new life in North Dakota, a booming oil province, that--when it came to oil--seemed like the limitless wilderness first encountered by Europeans landing on the American continent.

In Blood & Oil Hap Briggs is a poor farmer's son who has built up large holdings of ranch land which, of course, have oil under them. He gets into the oil business himself and can't get enough of it.

Newcomer Billy LeFever breezes into town with his wife, Cody, who overhears the cellphone call of a landman discussing the leasing of drilling rights for a ranch, the name of which he repeats back to his boss. Cody tells Billy who then looks up the ranch in the county land records and realizes that the key to exploiting the oil there is a small piece of land that allows access.

Through machinations which appear to be illegal, Billy, who is broke, raises the necessary money to buy an option on that key piece of land. He then makes his first million offering the option to none other than Hap Briggs.

It is shrewdness (and willingness to skirt the law) which brings Billy riches. He's intelligent, but not overly so. His big idea for making money in North Dakota was to open laundromats--an idea that gets dashed in the first episode when a traffic accident sends him, his wife and his washing machines into a ravine. The machines are ruined, but Billy and Cody escape essentially unharmed.

What we are really watching, however, is two stories. The second story is one of a human culture that has never abandoned hunting and gathering--though we moderns imagine that we would never stoop to anything so prehistoric. And yet, hunting and gathering is essentially what we do to get all the minerals we use including oil. And by the way, oil isn't "produced" as we so reflexively say, it is merely extracted. Nature does all the work over millions of years, so humans don't have to--or at least don't have to do very much.

This is a lottery designed by nature and exploited by humans lucky enough to have oil on their land or enough capital at their disposal to lease the right parcels. But it's a lottery with a special twist. If you are Hap Briggs, you can invest all your new fortune in getting even more oil out of the ground to make your fortune bigger.

But when the bust comes, you can end up broke. Well, the bust has come to real-life North Dakota. In less that one year oil prices went from around $100 a barrel to under $50. As a result, we are seeing bankruptcies among the oil independents who were kings just a year ago. And, of course, all the other new businesses designed to serve the burgeoning North Dakota population will have their ranks thinned considerably--as the exodus begins among those now without work in the wake of a drastic reduction in drilling activity.

And with severely reduced drilling, North Dakota oil production is bound to go down since we already know that the rate of production decline for existing wells averages 40 percent in the first year.

So the question is: When Blood & Oil's storyline bumps up against the realities of 2015, what will become of Hap and Billy? And, what will become of the bustling fictitious city of Rock Springs? I think a city in decline with its heroes penniless or nearly so will be of little interest to American audiences. Such a turn of events in fictional North Dakota will likely mark the beginning of the end for the series.

Until that day viewers can follow actor Don Johnson of Miami Vice fame who has swapped the cool elegance of pastel summer wear for a cowboy outfit that seems to hang attractively on his character, Hap Briggs. When the time comes, Johnson will simply change clothes again and go on to a new role--just as many new North Dakotans are now doing to seek work elsewhere in the face of a bust that according to the oil industry wasn't supposed to happen for decades.

_______________________________________________

*Saudi Arabia is purported to have 268 billion barrels of oil reserves. The Bakken and Three Forks formations (normally grouped together) are believed to hold 7.4 billion barrels. But these are not reserves which are known and readily producible, but so-called undiscovered, technically recoverable reserves that may not ever all be discovered. And what companies do find will almost certainly not be profitable to extract at current prices or perhaps even at much higher prices depending on the difficulty involved in extracting various deposits. Despite the seemingly large numbers, we must keep in mind that oil consumption today is also very large. The amount of undiscovered, technically recoverable oil reserves in The Bakken and Three Forks--even if all recovered--would last the United States only for a little over a year.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.